If you own a multifamily investment property, you might one day consider repositioning it. Perhaps you even bought it with that in mind. Repositioning is a catchall phrase for actions that can increase the income your property generates, as well as enhance its value to a prospective purchaser. The value of a multifamily property depends on that income, after all. Repositioning is a popular move, but investors must plan with care to be successful.
There are probably few, if any, multifamily properties that could not be repositioned in some way, but that does not mean all properties need repositioning. The current condition of your property might be so good that realizing the return on your investment of time and/or money would take too long to make repositioning worthwhile. But before you weigh the potential ROI against the time and cost of changes, you’ll first need to review your repositioning options.
Although the word often conjures images of construction crews and painters at work, repositioning by making cosmetic changes is not your only option. Raising rents and decreasing expenses are also forms of repositioning and they often require no cash outlay. For example, if your units are rented at below-market rates, raising rents to the appropriate level is a highly effective way of increasing cash flow.
Hiring or changing a management company may have a positive impact on expenses by introducing new policies and procedures that increase efficiency. Management companies also have differing fees, so take the time to research firms thoroughly.
If permitted in your state, consider implementing a RUBS (ratio utility billing system)—another no-cost or low-cost way to increase cash flow. With RUBS, the cost of utilities that are not metered at the unit level is divided equitably among residents, thereby passing much of this cost to them.
Other improvements, including replacing inefficient systems (HVAC, water heating, etc.) and adding communal amenities, may require major capital outlay. Adding desirable amenities such as the following can generate income by allowing you to raise rents:
- fitness center
- children’s play areas
- security features (cameras, fences, secure gates)
- custom finishes inside units
Less capital-intensive improvements can serve the same purpose, as cosmetic changes can have a nice visual appeal. Examples of this type of change include:
- landscaping improvements
- poolside accessories (barbeques, furniture)
- new signage
Other features can be added that will generate income on their own, such as storage areas, garages, or laundry facilities.
After you’ve decided how you’ll reposition, calculate your ROI. You’ll need a very close estimate of all improvement costs to determine if the necessary upgrades are financially prohibitive. Also remember to budget for the inevitable unplanned complications. If your calculations align with your available finances, move on with your plan by considering the following important factors:
The submarket. Repositioning has to make sense in the neighborhood and the surrounding communities. Some properties are in neighborhoods where no amount of improvement will draw higher rents, or where only very limited increases will be possible.
Tenant logistics. The changes you plan will affect residents. They’ll expect quiet during off hours and will need clear access to parking lots, garages, communal areas, and their homes, of course, at all times. On the financial side, if your property is in a neighborhood or submarket with rent-controlled buildings, you may be limited in your ability to raise the rents of current tenants after repositioning.
Timing. Outdoor work must be scheduled with the weather in mind, and projects have to be scheduled in relation to each other so different groups of workmen won’t get in each other’s way. Finally, delays are often unavoidable, so be prepared to adjust schedules quickly when warranted.
When done right, repositioning is a highly effective way to increase your cash flow and the value of your property. One way to ensure that repositioning goes smoothly is to partner with professionals who have the knowledge and experience to assess a property’s potential and see to it that the right changes are made at the right time.
At CWS Capital Partners, we are a fully integrated multifamily real estate investment management firm that offers everything from due diligence and risk management to transaction support and property management. We specialize in assisting our clients with 1031 exchanges, acquisitions, repositioning, and development. We also own and manage luxury multifamily investment communities in major markets around the country and employ a team of experts who can help you hone your investment strategy.
For more articles like this one, check out our investment strategy blog posts.
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The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.
All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.
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